An Overview of Popular DeFi Protocols: Funding and Performance

Decentralized finance protocols have seen staggering growth over the last two years, with 2020 hitting the milestone figure of over $12 billion in total locked assets. DeFi protocols, or autonomous programs, were built to solve pain points in the traditional finance industry. Decentralized lending allows users to borrow without going through a flawed banking system that many have become disillusioned with over the last decade. Peer-to-peer lending is an unrefined but promising glimpse into a future where people can borrow money without worrying about a banking collapse, fraud, or excessive fees for basic tasks.

However, the space is still in development and has many potential risk factors. In this piece, we’ll discuss some of the major projects in the space, their purpose, their financial backing, and their potential weak points.

In his first five months of unemployment, Adams found himself working on real-time projects based on the Ethereum network, a technological system that fascinated him. However, he was disappointed to discover that very few of these projects fully embraced the notions that Ethereum was built on. Things like censorship resistance, decentralization, permissionless transactions and security. This is what inspired Adams to create Uniswap, an enterprise that he said would embody everything that Ethereum and crypto stood for.

By January of next year, Adams had reached out to several acquaintances who had experience working with major tech companies like Google and Microsoft. Together, they built a small demo version of what would become Uniswap. Over the next few months, Adams would find himself traveling to crypto events in regions such as Canada and South Korea, where he would meet Ethereum founder Vitalik Buterin. Intrigued by his project, Buterin told Adams to apply for an Ethereum grant and rewrite Uniswap in Vyper.

How It Works

Yield Farming

Should Ethereum or any other ERC-20 token be contributed to the platform’s liquidity pool, the contributor garners what’s known as a pool token. This token can then be traded or moved around at the owner’s will. Should this money ever be reclaimed, it is immediately burned and taken out of commission.

Governance

The Uniswap team has no say in auditing or other legal matters, though they can occasionally delegate votes. Other than this, however, it is primarily the Uniswap community that has control over how the platform operates. If someone is looking to submit a governance proposal, they must pay approximately 1% of their overall UNI tokens. From there, anyone looking to vote “yes” on a submitted proposal must pay 4% of their UNI supply.

Funding

Yearn Finance, or YFI, was founded by South African entrepreneur Andre Cronje earlier in the year, who was initially part of the iEarn project up through last February. This project would produce so few results that Cronje would exit the program and later vowed to step away from the DeFi space for good, referring to it as a “toxic” environment. However, he would return in the late summer and rebrand iEarn as the YFI platform crypto traders know and love today.

As Yearn Finance, the company’s finances would reverse themselves from when it initially operated under the iEarn brand. As of late September of this year, Yearn’s total locked in value would exceed $1 billion.

Cronje’s technical expertise comes from his time spent with smart contract companies CryptoBriefing and Fantom, where he would oversee the release of crypto-related news media and the establishment of digital token offerings.

Prior to his work in the DeFi space, Cronje initially sought to study law, but later changed to computer science and completed a program in about half a year. He went into fintech and later gained fame and recognition for his code reviews before establishing himself as the founder of Yearn Finance.

How It Works

Governance

The company’s governance token is known as YFI. The token is given primarily to customers that provide some level of liquidity with their yTokens. There are no pre-mine or pre-sale events, and no funds are allocated to the Yearn Finance team, bringing a whole new level of decentralization to the company.

Yield Farming

Funding

Project Serum began when Sam and many of his counterparts at FTX looked into the prospects of developing a new derivatives exchange. At the time, Ethereum, despite its popularity and surging presence in the DeFi space, proved incapable of handling the major features Sam and his team members were looking to implement. They thus turned their attention to Solana (SOL), which they felt was a stronger and more efficient blockchain.

Getting Project Serum off the ground required partnerships and the assistance of many leading cryptocurrency enterprises including TomoChain, Compound, Multicoin Capital and Kyber Network. In addition, several advisors were brought on board such as Robert Leshner and Calvin Liu. The former is the founder of Compound, while the latter is the strategy lead.

How It Works

Some of the reasons for Project Serum’s adoption is that it runs on a blockchain that is completely compatible with both Bitcoin and Ethereum, something that’s rarely seen in the DeFi space. This gives Project Serum a huge advantage in that it allows traders to engage in transactions involving currencies other than ERC-20 tokens.

Furthermore, the company does not employ know your customer (KYC) protocols, meaning every person participating in the project remains fully anonymous. All these elements combined create an environment of trustless cross-chain trading.

Governance

Should the change be made, the money is not returned. Otherwise, if the alteration fails to garner approval, the money is burned or removed from commission. 60% of the total staked SRM is required if the change is to be incorporated.

Utility

Node operators garner SRM staking rewards depending on how well their nodes perform. If they don’t have enough SRM tokens in their wallets to host their own nodes, they can stake towards another user’s node and thus rake in small portions of the rewards in relation to that node.

Funding

How It Works

Governance

Yield Farming

Roughly 0.25% of trading fees go to active liquidity providers, while another 0.05% are converted back into SUSHI, the native cryptocurrency of the platform. These funds are then offered to SUSHI token holders.

Funding

The concept behind Compound is relatively simple. Compound exists to allow users to stake collateral in the hopes of earning interest and also to allow users to borrow funds and pay interest over time.

Compound is an algorithmic, autonomous interest rate protocol built on the Ethereum network, acting as a decentralized bank. It’s also a protocol that other applications can tap into and build on. Unlike a regular bank, where deposited savings can’t be used while they’re earning interest, Compound users can spend the money earned by their savings while the assets are still earning savings.

Users contribute various crypto assets to the liquidity pool and earn compound interest, with rates programmatically altered based on supply and demand. Below are the tokens users can currently lend or borrow, as well as the annualized percentage yield (APY), or interest, for doing so.

Users can stake ETH or other ERC20 tokens, like the stablecoin USDC. The platform shows the balance of staked assets as cTokens. Users can borrow 50–75% of the value of their cToken balance. For example, a user can stake $100 in Tether (USDT) and receive an equivalent amount of cTokens, shown as cUSDT.

Their cTokens will earn an interest rate based on the supply and demand on the platform, and users can also borrow $50-$75 for their cUSDT in another currency, like the stablecoin True USD. However, where there’s reward, there’s risk. If the value of a user’s collateral drops too low, the collateral may be liquidated. Even stablecoins can be susceptible to flash crashes at times, opening up users to a degree of risk — there’s also the possibility of a bug in the code for the protocol itself.

Interestingly, several Dapps have been built on Compound . One example is , a robo-advisory service aimed at helping users maximize the interest they earn. Compound is also partnered or associated with various other projects in the space. While Compound is a noncustodial solution, users can choose to secure their funds with custody services from Coinbase, BitGo, or Anchorage.

Governance

Anyone with 1% of COMP delegated to their address can then write proposals, which are executable code rather than written suggestions. Proposals are voted on for three days and then are executed if a majority vote is secured.

COMP token was listed on Coinbase on June 25, 2020, leading to a sharp spike in value.

They have transferred full control of their governance to the COMP token holders, with a minimum 2-day grace period before any accepted protocol changes are implemented. The admin capabilities, now firmly in the hands of the COMP token holder community, no longer represent a centralized point of failure for the Compound protocol.

However, the issue highlights that the term “decentralized” is not always as cut and dried as it seems, and there may be centrality issues in any of the DeFi protocols that have yet to be addressed.

Yield farming

In DeFi, yield farming with 100% returns is likely unsustainable, leading many to speculate that DeFi is in a bubble. However, while many people use COMP for speculative purposes, the fundamentals behind the project are undeniable. The platform serves as a functional lending platform with an increasingly decentralized leadership.

Funding

The network can perform token swaps and convert them to a crypto preferred by the user, helping to solve the issue of interoperability. This has use cases for ecommerce, wallet solutions, exchanges, and DeFi Dapps and protocols.

Dapps can enable people to use their platforms and services with tokens other than the native token, making Dapps far more accessible to the public, as many Dapps currently require users to hold the native token.

Users store their assets on-chain. Much like a bank, users can contribute idle assets to the liquidity pool. Tokens in the pool are available for anyone across any connected platform to use, and Kyber Network users earn a spread from every transaction made using tokens in the pool.

Using the pool, instant transaction settlement is possible, solving the issue of slow transaction speeds on congested blockchains and making crypto more viable as a means of purchasing or transacting.

Governance

Funding

Synthetix is a crypto exchange built on Ethereum. The exchange allows margin trading and is built in a decentralized manner, which appeals to many among the community. Synthetix users can gain exposure to Bitcoin and the U.S. dollar by speculating on price fluctuations, and the platform is working on incorporating TESLA stock and AAPL as well.

Synthetix users can create assets to represent stocks and shares on the network and exchange them for crypto. The platform uses two tokens: SNX and synthetic assets (sUSD).

SNX

SNX has an inflationary monetary system; 750% collateralization is required for synth assets, and staking this much SNX per synth makes SNX increasingly rare. This has multiple use cases, perhaps the greatest being easy access to stock market trading with lower fees.

Synthetix is partnered with Chainlink in order to establish decentralized oracles on the network.

Governance

The basic protocol design, incentive parameter settings, and system development are presently governed by the Synthetix foundation. Although the foundation initially made this tradeoff between centralisation and speed of development, it is committed to further decentralising key decision-making processes in the system. Steps in this direction are being taken by the development of community-driven governance and development methodologies.

Once the platform has fully decentralized, it may be a top contender in the world of decentralized asset exchange.

Funding

Originally published at https://www.sfox.com on October 26, 2020.

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